Bond markets for Latin American debt in the 1990s

Introducción During the 1990s the market for Latin America's debt grew in volume, types of instruments traded and number of investors and trade houses involved. Investors were drawn by high growthpotential and high yields in most Latin American countries, as well as by a general trend towards the implementation of economic and political reforms. As a result, the relative size of Latin America's market worldwide grew.This growth, however, was affected by a series of market events that underscored Latin America's vulnerability to financial shocks. Growth in trading volumes and asset values was first interrupted in 1994, in the aftermath of Mexico's peso devaluation in mid-December. Mexico's devaluation set in motion 'contagion' (the 'tequila effect');, which depressed market values throughout Latin America and other emerging markets during early 1995. Investor confidence recovered by mid-1995, following the massive rescue package for Mexico organized by the International Monetary Fund with support from United States and other G-7 countries. Capital flows to Latin America and other emerging markets grew considerably for the next two years. Market conditions were favorable until the onset of financial and economic difficulties in Southeast Asia in mid-1997. Market contagion spread these difficulties to Russia by mid-1998, which in turn led to more general, and more severe, contagion throughout the emerging markets in the latter half of 1998. The resulting loss of investor confidence eventually led to Brazil's January 1999 devaluation.An essential element of external financing in the 1990s was increasing access to the international bond market. The importance of bond financing as a source of external funding to Latin America rose substantially, with the number and value of bonds issued surging considerably over the course of the decade. Bond financing is currently one of the fastest growing sources of external development financing, being second only to foreign direct investment. On average, bond financing became the second major source of funding in Latin America in the 1990s. In order to assess the role of bonds as a source of external finance in Latin America in the 1990s, it is important to understand the behavior and evolution of bond spreads and the changes in debt composition due to liability management. This paper looks first at the role of the Brady plan, which redefined Latin America's integration into the global economy during the 1990s, as well as the role of debt buybacks and swaps. The changes in the composition of sovereign debt throughout the decade and the behavior of spreads are also analyzed, including the influence of credit ratings on Latin American bond spreads. In the 1990s the outstanding stock and volume of sovereign tradable Latin American debt showed an unprecedented increase, as it became increasingly liquid with the development of secondary markets. As liquidity increased, Latin American debt markets became more volatile. Bond flows to Latin America experienced strong volatility throughout the decade and were strongly concentrated in middle-income countries, particularly in Argentina, Brazil and Mexico. Spreads responded not only to economic fundamentals, but were subject to market sentiment as well. As a result, issues of financial volatility and contagion were particularly relevant to Latin American countries.